On second thought, GOP cap-and-trade cost estimates on the money

posted at 12:14 pm on April 22, 2009 by Ed Morrissey

Republican opponents to Barack Obama’s cap-and-trade policy claimed that the costs passed along to the energy consumer would eventually amount to about $3100 a year, calling this a tax by other means. Proponents scoffed at the suggestion, claiming that the actual cost would be less than a tenth of that amount. They cited John Reilly, an MIT professor who claimed that the GOP lied about the study he conducted in order to concoct that number — and organizations from newspapers to Think Progress to MS-NBC and even the Wall Street Journal used his statement to call Republicans liars for the last several weeks.

They may have to eat those words. Professor Reilly has rechecked his figures, and now he says that not only were the Republicans right after all, they actually underestimated the costs to the consumer. John McCormack scores the exclusive:

Many congressional Republicans, including members of the GOP leadership, have claimed that the plan to limit carbon emissions through cap and trade would cost the average household more than $3,100 per year. According to an MIT study, between 2015 and 2050 cap and trade would annually raise an average of $366 billion in revenues (divided by 117 million households equals $3,128 per household, the Republicans reckon).

But on March 24, after interviewing one of the MIT professors who conducted the study on which the GOP relied to produce its estimate, the St. Petersburg Times fact-check unit, Politifact, declared the GOP figure of $3,100 per household was a “Pants on Fire” falsehood. The GOP claim is “just wrong,” MIT professor John Reilly told Politifact. “It’s wrong in so many ways it’s hard to begin.” …

During a lengthy email exchange last week with THE WEEKLY STANDARD, MIT professor John Reilly admitted that his original estimate of cap and trade’s cost was inaccurate. The annual cost would be “$800 per household”, he wrote. “I made a boneheaded mistake in an excel spread sheet. I have sent a new letter to Republicans correcting my error (and to others).”

While $800 is significantly more than Reilly’s original estimate of $215 (not to mention more than Obama’s middle-class tax cut), it turns out that Reilly is still low-balling the cost of cap and trade by using some fuzzy logic. In reality, cap and trade could cost the average household more than $3,900 per year.

The $800 paid annually per household is merely the “cost to the economy [that] involves all those actions people have to take to reduce their use of fossil fuels or find ways to use them without releasing [Green House Gases],” Reilly wrote. “So that might involve spending money on insulating your home, or buying a more expensive hybrid vehicle to drive, or electric utilities substituting gas (or wind, nuclear, or solar) instead of coal in power generation, or industry investing in more efficient motors or production processes, etc. with all of these things ending up reflected in the costs of good and services in the economy.”

In other words, Reilly estimates that “the amount of tax collected” through companies would equal $3,128 per household–and “Those costs do get passed to consumers and income earners in one way or another”–but those costs have “nothing to do with the real cost” to the economy. Reilly assumes that the $3,128 will be “returned” to each household. Without that assumption, Reilly wrote, “the cost would then be the Republican estimate [$3,128] plus the cost I estimate [$800].”

At issue is what happens to all of the cap-and-trade funds that get collected by the government in the Obama plan. In order to believe that the Obama-predicted revenues pulled out of the energy industry won’t impact the consumer, either one has to believe that energy producers won’t pass along those costs in price hikes (which is ridiculous), or that the Obama administration envisions a profit-sharing plan in which the money all goes back to the consumers. The latter is equally ridiculous, and demonstrably so. In the first place, Obama has already hiked federal spending $400 billion in the next fiscal year, and even his own OMB predicts trillion-dollar deficits for the next decade after that. Massive rebates might sound great to Republicans, but Democrats will never, ever agree to them. In any case, with these deficits, the money for rebates technically doesn’t exist.

Besides, the money has already been earmarked. Obama himself said he would use the money for massive government expenditures on renewables research. Other Democrats counted on the money to fund health-care reform. No one in the administration or Congress ever envisioned giving the money back to the consumers, directly or even indirectly.

Once the government gets this money from energy production, they’re going to keep it. That means that Reilly’s final figure of $3900 per household is the correct number to use. It validates what the Republicans have said all along — that Obama’s cap-and-trade policy will be a disastrous burden on American families. Maybe all of the scoffers should read what Reilly has to say now, but that’s not nearly as much fun as calling Republican liars.

Cap and Trade…probably the grossest policy error ever proposed by the american left. The straight up silliest sh*t. Ever.
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ernesto on April 22, 2009 at 1:03 PM

The cap-and-trade idea is firmly grounded in modern economic theory. That’s not to say it isn’t wrong, but it’s well-supported academically.

If one assumes that energy production and use carries with it a negative “externality”—a cost to society that is not reflected in the market price—then the economically-efficient thing to do is to apply some manner of tax to reduce energy consumption to the hypothetically-optimum level. If these assumptions are correct, a cap-and-trade system reduces energy consumption to the optimum level with the lowest deadweight loss among the various possible tax or regulatory schemes.

I commend the MIT professor for deciding to recheck his work and remove errors which provide false results. I would not be so quick to smash this guy down into the dirt for making an error in calculations, a simple minus sign somewhere can, at the end of your calculations, can leave your answer way off where it’s supposed to be. What’s important here is that he found his mistake, corrected it, admitted to it, and changed his opinion from the output of the data. That’s science!

Weebork on April 22, 2009 at 12:32 PM

I’m willing to make a large wager that Professor Reilly did not find his mistake on his own and then decide to publicly disclose the correct figures. It is more lkely that someone else discovered it and gave him the chance to save face before they disclosed the error themselves.

In the area of such a social science where the numbers generated have a far reaching and major impact his work was shoddy and commending him for honesty is misplaced. With that kind of study, for public policy release and impact, you check, recheck, and recheck again, your results. You then have peers review the results.

If, in the 45 years I spent in an applied science, in public corporations and consulting, if I had generated a mistake of that magnitude I would have been dismissed.

I smell a bit of partisanship and coverup that existed until disclosure was imminent.

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If, in the 45 years I spent in an applied science, in public corporations and consulting, if I had generated a mistake of that magnitude I would have been dismissed.

I smell a bit of partisanship and coverup that existed until disclosure was imminent.

Yoop on April 22, 2009 at 2:57 PM

As I obliquely indicated in my first comment to this story (hicsuget on April 22, 2009 at 12:26 PM), the mistake in the calculations here was not so gross–$200 vs $800 = NBD. The wider disparity, the missing $3100, was not a calculation error at all; it was the result of an economist thinking like an economist.

Suppose a $50 gift card to Red Lobster can be had in exchange for $50 cash. Ask an accountant how much the gift card costs, and he will tell you “$50”. Ask an economist how much it costs, and he will tell you “$0”. The economist isn’t wrong; he’s just thinking about things very differently. It just so happens that in the particular case of calculating the economic impact of cap and trade on the median household, to think like an accountant makes more sense than to think like an economist.

The left is going to have to hurry as global cooling continues to gain notice and the feds wanting to double dip in my pocket for another $300 per month. Another full on attack on the American middle class. The rich can afford it, the poor will be subsidized by all, and the middle class will pay for it.

Here in CA, every time people “do the right thing” by conserving water or electricity or natural gas (either voluntarily or as a result of higher taxes or higher rates), we can expect the Public Utilities Commission to announce that due to falling revenues they have approved increases to utility rates for the resource showing reduced consumption levels.

So, the static model approach is faulty in that unit rates must go up in a vicious cycle to offset reductions in usage. Unless Obama wants to nationalize the power/water/gas companies, too. I guess then we can have “free” heat, light and water service…

It just so happens that in the particular case of calculating the economic impact of cap and trade on the median household, to think like an accountant makes more sense than to think like an economist.

hicsuget on April 22, 2009 at 3:08 PM

Accounting is economic record keeping. Economics is a social science. Was Reilly doing record keeping or science? There is, obviously, a very large difference in impact of the two when it comes to selling a program that impacts the common taxpayer.

If he was doing science then he failed miserably. If he was simply doing accounting then he should have said so. Since he is a Professor of Economics, at MIT, people would assume he was doing the job of a social scientist, not the job of an accountant.

The cap-and-trade idea is firmly grounded in modern economic theory. That’s not to say it isn’t wrong, but it’s well-supported academically.

If one assumes that energy production and use carries with it a negative “externality”—a cost to society that is not reflected in the market price—then the economically-efficient thing to do is to apply some manner of tax to reduce energy consumption to the hypothetically-optimum level. If these assumptions are correct, a cap-and-trade system reduces energy consumption to the optimum level with the lowest deadweight loss among the various possible tax or regulatory schemes.

hicsuget on April 22, 2009 at 2:39 PM

If these assumptions are correct. IF is the key word. There is no proof that carbon dioxide emissions “cost” anything to society beyond the market price of fuel–the scare about “global warming” is based on results from “climate models” which have been fed inaccurate “forcing functions” and feedback parameters.

I work with many professional meteorologists (who should know weather better than laymen), and all but one of them DON’T believe in global warming, and the youngest is on the fence. The best weather-forecasting models are reasonably accurate to about five days into the future, then the model predictions diverge from the eventual weather experienced within ten days. If a computer model can’t predict the weather 10 DAYS into the future, how can a model hope to predict anything 100 YEARS into the future?

Global average temperatures have been DECREASING since 1998, and rather sharply since 2006, but CO2 concentrations continue to increase. If CO2 causes global warming, why is it getting cooler now? What do you believe, the gee-whiz wonderful climate models, or all the thermometers on the planet?

Cap-and-trade does work for REAL pollutants, where there is a “cost to society” for emitting them. For example, cap-and-trade has worked for sulfur dioxide (SO2), which causes acid rain, and damages trees and wildlife, and degrades metallic buildings. Why did cap and trade work there? Because it’s possible to remove 98%+ of sulfur dioxide emissions from a stack using relatively inexpensive scrubbers, to generate sulfuric acid which can be sold for use in car batteries. If the scrubber costs less than the price of SO2 emissions, industries will buy the scrubber and sell their SO2 credits to somebody who can’t afford a scrubber, and the total emission of SO2 decreases. Between 1990 and 2000, total SO2 emissions in the USA decreased by 20.4%, despite an economic expansion during that decade.

The problem with CO2 is that you can’t burn anything (coal, oil, natural gas, wood, even ethanol) without generating it, and it’s extremely expensive to capture, and the “cost to society” of emitting it is negligible–it’s just not plain worth capturing!

Carbon dioxide is NECESSARY for life on Earth–it’s plant food, and NOT toxic. In fact, many experiments show that high CO2 levels in the air speed up plant growth and increase crop yields, meaning that higher future CO2 levels could lead to a greener, more fertile Earth. If the “cost to society” of CO2 emissions is NEGATIVE, why bother trying to limit them?

Okay, so yesterday I heard that the EPA is forcing this on us, not the Obama administration, yeah right. I mean, does it matter? Do they really think that this is not going to make the citizens of this country angry? I mean people from all parties were mad as hell when gas got so high last year, with the exception of the really crazed eco nuts. How does the fact that the EPA is pushing this, shield Obama from cap and trade backlash?

No one but the fairly well-off can really afford another $3,000 or more a month for energy costs. The part of the country I live in needs heat in the winter and AC in the summer, people used to die from lack of heating and cooling, (still do sometimes). We have to have our cars because there is no public transportation except a measley, lousy bus service that take 2 hours to go across this very spread out city of over 700,000 people. And to make things worse, here we are in the middle of a recession!

What does Obama get out of this? Is he really drinking this global warming kool-aid BS, or what does he get out of it.He has shown that he is not willing to give up his “tropically warm” office, or his gas-guzzling cars, or flying chefs around the country just to cook him a damn pizza! I don’t get it!

If these assumptions are correct. IF is the key word. There is no proof that carbon dioxide emissions “cost” anything to society beyond the market price of fuel–the scare about “global warming” is based on results from “climate models” which have been fed inaccurate “forcing functions” and feedback parameters.
…

Cap-and-trade does work for REAL pollutants, where there is a “cost to society” for emitting them. For example, cap-and-trade has worked for sulfur dioxide (SO2), which causes acid rain, and damages trees and wildlife, and degrades metallic buildings. Why did cap and trade work there? Because it’s possible to remove 98%+ of sulfur dioxide emissions from a stack using relatively inexpensive scrubbers, to generate sulfuric acid which can be sold for use in car batteries. If the scrubber costs less than the price of SO2 emissions, industries will buy the scrubber and sell their SO2 credits to somebody who can’t afford a scrubber, and the total emission of SO2 decreases. Between 1990 and 2000, total SO2 emissions in the USA decreased by 20.4%, despite an economic expansion during that decade.

The problem with CO2 is that you can’t burn anything (coal, oil, natural gas, wood, even ethanol) without generating it, and it’s extremely expensive to capture, and the “cost to society” of emitting it is negligible–it’s just not plain worth capturing!

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Steve Z on April 22, 2009 at 3:35 PM

I hope I didn’t give the impression I agreed with the assumptions; I was merely elucidating the thought process our esteemed Professor Reilly is using.

Most of society believes in global warming; therefore most of society believes that there is a social cost to CO2 emissions. You can argue with the climatologists on this point (in fact I encourage you to), but once they have spoken the economist’s job is to come up with the least costly way to meet the policy goal established on account thereof.

Your description of how cap-and-trade for SO2 works doesn’t capture the whole story. Allow me to paint a more complete picture:

From the point of view of society (i.e. government regulators), there is some optimum level of total SO2 emissions. They don’t care who emits what, so long as the total SO2 does not exceed that limit. Ways to reduce SO2 emissions to that level include: quotas on each industry, taxes on quantities emitted, and cap-and-trade.

Quotas will yield the desired amount of total emissions, but the costs of reducing emissions vary from industry to industry and from firm to firm. Thus, if every firm’s quota in year 1 is set to n% of their actual emissions in year 0, say, some firms will suffer much more than others–such an arrangement produces what economists call “deadweight loss.”

Taxes based on quantities emitted allow firms to decide whether it is less expensive to emit more than their share (their share, of course, being based on their share of emissions in year 0) and to pay extra taxes versus reducing their emissions. Thus, this arrangement does not come with DWL. However, it is impossible to know at what rate to set the taxes to yield the optimum total emissions, so the policy goal is not met.

Cap-and-trade combines the two strategies. It fixes total output to the desired level IAW policy, yet it allows flexibility as to which firms reduce emissions and which firms bear the tax burden instead of emissions reduction.

Because it meets the policy goal with no DWL, cap-and-trade is something of a holy grail to economists. But bear in mind, economists have abdicated the question of whether or not a particular policy goal is desirable to other fields.

Also, note that to apply this system to anything else–say, quantity of DVDs purchased in a household–would yield an outcome that even a Keynesian would say is inefficient. It only yields no DWL in economic models because of the assumption that the emissions have an external cost.

P.S. Don’t dare tell an economist that the social cost to ANYTHING is negative (i.e. there is a positive externality)–he’ll start pushing for the government to subsidize it. ;-)

I’m not sure about the rest of you, but an additional $325 per month on energy costs is one less car payment, or lots less eating out, or lots less new clothing, etc. The economy will suffer disasterous consequences from such a policy.

Well you know what? They can laugh all they want, but they will figure it out when the light bill jumps up. Add to that the fact that we will have emissions traders out there making money off the newest boondoggle to hit DC. I just hope there is not another Enron style scandal.

Well you know what? They can laugh all they want, but they will figure it out when the light bill jumps up. Add to that the fact that we will have emissions traders out there making money off the newest boondoggle to hit DC. I just hope there is not another Enron style scandal.

Terrye on April 22, 2009 at 7:01 PM

Ironically enough tax and hide aka cap and trade was one of Enron’s schemes. They just got caught before they got to enact this one.